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Stephanie Bolhmann

International Newport Group Economy News Tokyo

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(Reuters) - Japan posted its smallest annual current account surplus on record in 2012 as exports weakened and energy imports grew, a signal to Prime Minister Shinzo Abe that economic revival needs more than just a weaker yen and extra spending.

The current account surplus is likely to continue shrinking as energy imports rise due to the closure of nuclear power plants and as Japanese exporters lose out to more competitive Asian rivals, economists say.

Japan's current account surplus was 4.7 trillion yen ($50.4 billion) in 2012, Ministry of Finance data showed, a figure that seems impressive. But it was less than half the surplus recorded a year earlier and the smallest since 1985, when Japan started compiling comparable data.

The deterioration was most marked at the end of the year, with Japan posting consecutive monthly deficits for the first time as the December shortfall hit 264.1 billion yen, more than 80 percent bigger than the median forecast in a Reuters poll.

"Energy imports and higher energy costs are structural factors that will cause the current account surplus to decline further," said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co.

"Currency moves can only go so far in improving corporate competitiveness. There are other areas like corporate taxes or incentives for business investment where Japan is lagging."

Abe, who won office in December, wants to "correct" the trend for excessive yen gains to help the economy. He also wants to shake off nearly 20 years of deflation through aggressive central bank action and increased spending.

Since November, as Abe became the election frontrunner, the yen has fallen 16 percent in anticipation of his economic agenda and is now near three-year lows against the dollar.

However, a shrinking surplus means Japan's status as a creditor to the world is in jeopardy. This could trouble policymakers because it would mean a weaker yen is a symptom of waning fortunes, and not the catalyst for economic revival.

Data last month showed Japan posted a record trade deficit of 6.9 trillion yen in 2012, as exports fell in annual terms through the second half of the year.

The theory is that a weaker yen will reignite the export engine in coming months, but that assumes there will be demand -- something Japan's once-dominant electronic makers are struggling with.

The weaker yen will not stop Nintendo Co Ltd, the world's leading gaming company by machines sold, from posting an operating loss for a second straight year.

And while Sony Corp said it is finding some salve from the weaker currency, it is still cutting sales forecasts and struggling to find a footing between industry leaders Apple Inc and Samsung Electronics Co Ltd and cheaper products from firms in China or Taiwan.

Not all firms are in that predicament. Toyota Motor Corp reclaimed its position as the world's best-selling carmaker in 2012, and the falling yen should increase its foreign competitiveness and boost its profits.

Japan also faces a structural shift in its trade accounts as public opinion remains firmly against restarting the 48 nuclear power plants shut since the Fukushima nuclear disaster in March 2011. Only two plants remain in operation.

Those stations generated one-third of Japan's power needs, which is now covered by imports of oil and natural gas -- which become more expensive as the yen loses value.

"I am not expecting Japan's current account deficit will become a trend, but the surplus will probably stay at a lower level," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute in Tokyo.

"Japan's energy imports are expected to stay high this year and next year. The recent yen decline will likely help boost exports but at the same time it will adversely impact import costs."

For now, markets are optimistic that Abe's policies will give the economy a boost.

Analysts expect the economy will grow around 2 percent in the next fiscal year starting April, aided by the new government's stimulus spending, aggressive monetary policy easing and the yen's retreat.